Combination of SA legislation and credit crisis makes for challenging times
EFFECTS OF HIGHER COSTS of funding globally have started to show on the bottom line of micro financier Blue Financial Services. In South Africa the problem was exacerbated by the introduction of the National Credit Act (NCA), as is evident from the company’s results at the interim period to August 2008.
Blue’s interest income jumped to R187,6m over that period, almost a full R100m more than the R87,9m achieved at the corresponding period last year. In the six months to August 2007, Blue spent R15,8m on interest, which jumped to R61,4m this August. What that means is Blue spent nearly 33c on interest for every rand it collected from its own debtors against 18c/R1 at the same time last year. Net interest income of R125,9m in August was 67% of revenue, against 81,9% last August.
In Blue’s biggest market – SA – the cost of funding was even worse than in the 11 other countries in which it operates. Interest income was R72,5m and interest expenses came in at R44,6m – 61,4% of revenue. A comparison between Botswana (34%) and Zambia (24, 5%) clearly shows the SA situation was a direct result of the cap in interest charges introduced by the NCA.
Blue CE Dave van Niekerk admitted as much in an interview. “We’d have done better if there was no NCA,” he says. SA saw the lowest growth in loan advances at 65%, against the group’s 236% – which took the loan book value to R876m. Funding liabilities increased by 162%, from R211,2m to R553,6m as at August.
To counter the effects of the NCA in SA (which Van Niekerk readily admits “played a very important role buffering the country against the global financial crisis”) Blue is looking at the conclusion of its acquisition of fellow micro-lender Credit U. It’s paying 240c/share for the company – an earnings multiple of 6,5 times. That will help achieve economies of scale, as it will increase Blue’s branch network by 92 outlets and add R280m to its debtors book. That should also lower its cost of credit on the part of Credit U, as it currently borrows at prime plus 6% interest against Blue’s prime minus 1%.
However, it’s not only the effects of the NCA that Blue has to worry about. Higher interest rates in SA are also putting pressure on households’ ability to service their debts, putting upward pressure on bad debts. Whereas in August 2007 there was a R2,7m credit on the “impairment of loan advances” this time round the figure deteriorated to more than R19m – 10,21% of the revenue but 2% of the advances book. Van Niekerk says the group has budgeted for bad debts of 6,3% and 7,4% for its SA unit. The R4,8m impairment charge (previously a credit of R4,5m) for SA, accounts for 25% of the group interim impairment figure.
However, Blue finance director Grant Chittenden says the company’s arresting the situation. “We reject about 40% of credit applicants and have improved on arrears collections in the last six months,” he says. Blue’s bad debts have come down from 9,2% of revenue in February to the current 6,69% in the SA unit. The rest of Africa has no problem with bad debts, as deductions occur at source.
What’s also going to be a challenge is the current global credit crisis. “We’re not affected by the crisis except by the price of credit. It’s going to be tough raising funds cheaply in the current financial markets,” says Van Niekerk. “Funding is going to be more expensive.”
Dave van Niekerk